ACC 205 week 5 Exercise

  

Financial Ratios

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Week Five Exercise Assignment

Financial Ratios

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

   

Edison

Stagg

Thornton

 

Cash

$6,000

$5,000

$4,000

 

Short-term investments

3,000

2,500

2,000

 

Accounts receivable

2,000

2,500

3,000

 

Inventory

1,000

2,500

4,000

 

Prepaid expenses

800

800

800

 

Accounts payable

200

200

200

 

Notes payable: short-term

3,100

3,100

3,100

 

Accrued payables

300

300

300

 

Long-term liabilities

3,800

3,800

3,800

           

1. Compute the current and      quick ratios for each of the three companies. (Round calculations to two      decimal places.) Which firm is the most liquid? Why?

  

2. Computation and evaluation of   activity ratios. The following data relate to Alaska Products, Inc:

        

20X5

20X4

 

Net   credit sales

$832,000 

$760,000 

 

Cost   of goods sold

530,000

400,000

 

Cash,   Dec. 31

125,000

110,000

 

Average   Accounts receivable

205,000

156,000

 

Average   Inventory

70,000

50,000

 

Accounts   payable, Dec. 31

115,000

108,000

 

Instructions

a. Compute the accounts receivable and inventory turnover ratios for   20X5. Alaska rounds all calculations to two decimal places.

 

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 20X7:

   

 

Net sales

$1,750,000 

 

Interest expense

120,000

 

Income tax expense

80,000

 

Preferred dividends

25,000

 

Net income

130,000

 

Average assets

1,200,000

 

Average common stockholders'   equity

500,000

 

 

1. Compute the profit      margin on sales ratio, the return on equity and the return on assets,      rounding calculations to two decimal places.
2. Does the firm have      positive or negative financial leverage? Briefly ex­plain.

  

4. Horizontal analysis. Mary Lynn Corporation has   been operating for several years. Selected data from the 20X1 and 20X2   financial statements follow. 

       

20X2 

20X1

 

Current Assets 

$86,000 

$80,000   

 

Property, Plant, and Equipment   (net) 

99,000

90,000

 

Intangibles 

25,000

50,000

 

Current Liabilities 

40,800

48,000

 

Long-Term Liabilities 

153,000

160,000

 

Stockholders’ Equity 

16,200

12,000

 

Net Sales 

500,000

500,000

 

Cost of Goods Sold 

322,500

350,000

 

Operating Expenses 

93,500

85,000

       

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment   on the results of your work. 

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. 

  

20X2 

20X1

 

Current Assets 

$86,000 

$80,000 

 

Property, Plant, and Equipment (net) 

99,000 

80,000 

 

Intangibles 

25,000 

50,000 

 

Current Liabilities 

40,800 

48,000 

 

Long-Term Liabilities 

153,000 

150,000 

 

Stockholders’ Equity 

16,200 

12,000 

 

Net Sales 

500,000 

500,000 

 

Cost of Goods Sold 

322,500 

350,000 

 

Operating Expenses 

93,500 

85,000 

       

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work. 

 

6. Ratio computation. The financial statements of the Lone   Pine Company follow.

LONE PINE COMPANY

Comparative Balance Sheets

December 31, 20X2 and 20X1   ($000 Omitted)

20X2   

20X1

Assets 

Current Assets 

Cash and Short-Term Investments 

$400 

$600 

Accounts Receivable (net) 

3,000

2,400

Inventories 

3,000

2,300

Total Current Assets 

$6,400 

$5,300   

Property, Plant, and Equipment 

Land 

$1,700 

$500 

Buildings and Equipment (net) 

1,500

1,000

Total Property, Plant, and Equipment 

$3,200 

$1,500   

Total Assets 

$9,600 

$6,800   

Liabilities and Stockholders’   Equity 

Current Liabilities 

Accounts Payable 

$2,800 

$1,700   

Notes Payable 

1,100

1,900

Total Current Liabilities 

$3,900 

$3,600   

Long-Term Liabilities 

Bonds Payable 

4,100

2,100

Total Liabilities 

$8,000 

$5,700   

Stockholders’ Equity 

Common Stock 

$200 

$200 

Retained Earnings 

1,400

900

Total Stockholders’ Equity 

$1,600 

$1,100   

 

Total Liabilities and Stockholders’ Equity   

$9,600 

$6,800   

LONE PINE COMPANY

Statement of Income and   Retained Earnings

For the Year Ending December   31,20X2 ($000 Omitted)

Net Sales* 

$36,000 

Less: Cost of Goods Sold 

$20,000 

Selling Expense 

6,000

Administrative Expense 

4,000

Interest Expense 

400

Income Tax Expense 

2,000

32,400

Net Income 

$3,600   

Retained Earnings, Jan. 1 

900

Ending Retained Earnings

$4,500   

Cash Dividends Declared and Paid   

3,100

Retained Earnings, Dec. 31 

$1,400   

*All sales are on account. 

          

Instructions 

Compute the following items for Lone Pine Company for 20X2, rounding all calcu­lations to two decimal places when necessary: 

a. Quick ratio 

b. Current ratio 

c. Inventory-turnover ratio 

d. Accounts-receivable-turnover ratio 

e. Return-on-assets ratio 

f. Net-profit-margin ratio 

g. Return-on-common-stockholders’ equity 

h. Debt-to-total assets 

i. Number of times that interest is earned